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Explained: Why the ‘eminently sensible’ minimum wage hike won’t worry the RBA

Interest rates are expected to be held again this week.

Interest rates are expected to be held again this week. Photo: TND

Australia’s annual minimum wage decision always sparks debate about whether an income boost for millions of low-paid workers will stoke inflation pressures or even worry the RBA.

This year has been no different; with all-too-familiar claims about wages and prices swirling across the industrial divide after the umpire’s latest decision to award a 3.75 per cent rise.

Industry groups, who advocated another real wage cut, argued it was on the “high side” and that “wage pressures would continue to bear on the RBA” as it battles stubborn inflation.

Unions in turn accused employers of making erroneous claims and applauded the FWC for delivering a real wage increase – even if the outcome was only slightly ahead of inflation.

Workers, meanwhile, are once again caught in the middle after years of their purchasing power shrinking in the face of high inflation and little prospect of regaining much ground.

Fortunately, economists are looking through the spin and believe the FWC delivered a measured wage verdict that shouldn’t upset the RBA’s apple cart or spark a rate hike.

Veteran economist Saul Eslake called the minimum wage decision “eminently sensible”.

“The RBA will welcome the decision,” Eslake told The New Daily. “I don’t think it alters the outlook for interest rates at all.”

Wages and prices

Vested interests are practised in making wild claims about wages and prices, whether that’s stoking fears about wage spirals, or that corporate profits triggered the cost-of-living crisis.

They’re able to seize on uncertainty within the debate because the relationship between wages and prices is tricky to unpack across such a large and complex modern economy.

Productivity growth, for example, is a key part of the equation and was front of mind for the FWC this year as it sought to deliver a wage increase that wouldn’t worsen inflation.

That’s because in the absence of productivity growth an increase in wages can deliver higher prices – a logic that makes sense when thinking about one business trying to cover its costs.

But when scaled up to the economy, things get murkier.

Oxford Australia’s Sean Langcake saying it’s hard to even measure productivity in real time, let alone how it affects prices.

“The degree to which [minimum] wages feed into prices is determined as much by productivity growth as the stroke of the [FWC’s] pen – and it’s out of their control,” he said.

Eslake said productivity will be important in how the wage hike translates to prices, but he also noted the scale – about $3.8 billion combined – will also temper any impacts.

“That’s barely a rounding error in a $2.75 trillion economy (which Australia’s will be in 2024-25),” he explained.

Productivity uncertainty

Productivity uncertainty has emerged as a key issue for the RBA in trying to get inflation back from 3.6 per cent currently to within its 2 to 3 per cent target in the next 18 months.

Langcake said that because the RBA can’t observe productivity well in real time they’re forced to look at long-term averages and assume Australia will converge towards that level.

If that doesn’t happen, though, it’s possible that the level of wages growth consistent with inflation reaching the target could be lower than otherwise, or that the easing takes longer.

Fortunately, there have been signs labour productivity is trending upwards over the past 12 months as economists continue to theorise why it sank since Covid-19.

If the trend continues the RBA has been clear that current levels of wage growth are consistent with inflation falling back to its target without necessarily needing higher rates.

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